Global Recessions

Two approaches are employed to identify the turning points of the global business cycle: a statistical method and a judgmental method. The methods are complementary but employ different information sets. Both follow the "classical" definition of a business cycle, under which business cycle expansions are marked by increases in many measures of economic activity, and contractions by broad declines in activity. Both are widely used in the context of national business cycles, and often arrive at similar turning points. 

Statistical Method. The statistical dating method used here was introduced by Harding and Pagan (2002).  The method is convenient since the turning points identified are robust to the inclusion of newly available data. The method makes it possible to identify global recessions, defined as taking place when the annual growth rate of per capita global real GDP is negative. However, per capita real GDP growth alone may not be sufficient as an indicator of the cyclical evolution of economic activity. For this reason, the Business Cycle Dating Committees of the U.S. NBER and the Europe-based CEPR (Centre for Economic Policy Research) employ broad sets of economic indicators and apply a "judgmental method" to identify the turning points of national or regional cycles. 

Judgmental Method. This method involves analyzing a broad set of macroeconomic indicators and reaching a judgment on whether the evidence points to expansion or recession. The NBER uses this method to determine the dates of cyclical turning points, expansions, and recessions in the U.S. economy, and the CEPR does so for the euro area. The NBER examines, for example, movements in real GDP, industrial production, retail sales, employment, and disposable income; it states that "[the] Committee does not have a fixed definition of economic activity." Because different indicators can exhibit conflicting signals about the direction of activity, the judgmental method may not be straightforward to apply in real time. The CEPR's task may be considered even more complex than that of the NBER since it has to determine cyclical conditions in the multi-country context of the euro area. 

The judgmental method is applied at the global level through analysis of a selected set of indicators of global activity – movements in real GDP per capita, industrial production, trade, capital flows, oil consumption, and unemployment. Some of the variables used by the NBER and CEPR are not available for a large enough number of countries over a sufficiently long period. However, the measures employed here capture the essentials of the information supplied by the country-specific variables used by these institutions. Moreover, they provide a reasonably comprehensive perspective on the evolution of the global business cycle. In addition to the standard activity measures, such as GDP, industrial production, and unemployment, other variables capture the changes in global commerce and finance (trade and capital flows), and global energy consumption (oil consumption). 

Using these two methods, a global recession is defined as an annual contraction in world real per capita GDP accompanied by a broad decline in various other measures of global economic activity. A global recession begins just after the world economy reaches a peak of activity and ends when it reaches its trough. The recovery is defined as the early part of the expansion phase.  The recovery phase is often considered as the first year following the trough of the business cycle, but to obtain a broader understanding, developments in the first three years following a global recession are also examined here. The global expansion phase is the period between the end of one recession and the beginning of the next one.